The Problem of Tax Evasion and Tax Avoidance in Nigeria: an Assessment By Adeke Aondongu Abel, Esq.

Abstract

Taxation has become one of the major sources of revenue generation for the government at all levels following the global fall in oil prices all over the world, countries have therefore turned their searchlight towards coming up with modalities on how to source for revenue using various forms of tax collections available to them. Tax payer on the other hand have also devised legal means of minimizing their tax obligations through the use of the ingenuity of tax avoidance or illegally shy away from paying their taxes or reducing them through the use of various schemes of tax evasions.

Keywords: Tax Avoidance, Tax Evasion, Revenue, Economy

• INTRODUCTION

The importance of taxation in good governance cannot be overemphasized; the realization of this has a long history in Classical Economics, beginning from Adams Smith, through other Classical Economists like David Richardo and John Stuartmill, the place of taxation in the running of successful government, has been recongnized. Revenue generation is viewed as the primary and important role of taxation. Taxation is however not only a means of revenue generation for Government; it can also be used to stimulate other sources of Government revenue and develop other areas of the economy from which Government can realize revenue. However, when there are leakages in tax collection through evasion and avoidance, it is usually associated with high unemployment.[1]

Tax evasion has been issue of concern in the Nigerian tax system for a very long time. Tax evading attitude is argued to have an adverse effect on government’s socio economic and political programs. Many commentators and analyst blame the situation on the tax authorities, not living up to expectation with regards to tax administration; others attribute the case to the unpatriotic attitude of tax payers.[2] A major challenge to government in generating revenue has been the increasing rate of tax evasion and tax avoidance. Therefore, tax evasion and avoidance are important factors to be considered as they affect both the volume and nature of government finances which is the key to economic development. Lack of good governance and unpatriotic act of tax payer, is the basis for which tax evasion and avoidance activities is perpetrated.[3]

Because of the great role taxes play in the development of the economy this paper will appraise the concept of tax evasion and tax avoidance in Nigeria with the help of some decided cases.

• MEANING AND NATURE OF TAX AVOIDANCE AND TAX EVASION

In the words of Auru, tax avoidance is the arrangement of a business financial year and the timing of tax and duty payment so as to reduce overall tax liability. However, the individual or company must ensure that its action is conducted within the provisions of the prevailing tax laws.[4]

Tax evasion on the other hand relates to a situation whereby business activities are arranged deliberately with all intent and purpose not to pay tax at all or to remit an incorrect amount of tax.  Tax evasion is a criminal offence because it involves falsification of financial and management information, withholding or failure to render correct returns, bribing tax officials and non conformity with applicable tax laws.[5]

For the Black’s Law Dictionary, tax avoidance is the act of taking advantage of legally avoidable tax planning opportunities in order to minimize ones tax liability. While tax evasion is the willful attempt to defeat or circumvent the tax laws in order to illegally reduce ones tax liability. Tax evasion is punishable by both civil and criminal penalties.[6]

For Investopedia tax avoidance is the use of legal methods to modify an individual’s financial situation to lower the amount of income tax owed.  This is generally accomplished by claiming the permissible deductions and credits.  Tax evasion on the other hand applies to both the illegal non-payment as well as the illegal underpayment of taxes.[7]
In the words of Lexicon tax avoidance is a practice of using legal means to pay the least amount of tax possible. This is different to tax evasion which is the practice of using illegal methods to avoid paying tax.[8]

Somorin defined tax evasion as:

Contravention of the Tax law whereby a person who derives a taxable income either pays no tax. or pays less tax than he would otherwise be bound to pay. Tax evasion includes the failure to make a return of taxable income or the failure to disclose in a return the true amount of income derived.[9]

A more elaborate definition of tax evasion has been given by the Canadian Department of National Revenue as follows:[10]

The commission or omission of an act knowingly with intent to deceive so that the tax reported by the taxpayer is less than the tax payable under the law, or a conspiracy to commit such an offence. This may be accomplished by the deliberate omission of revenue, fraudulent claiming of expenses or allowances, and the deliberate misrepresentation, concealment or withholding of material facts.

In the words of Kwaghkehe,[11] tax evasion is the act of not paying ones lawful tax. Tax avoidance on the other hand denotes the taxpayers’ ingenuity to arrange his affairs in a proper manner so as to reduce the incidence of tax.

In the words of Ayua, tax evasion is the failure to pay ones tax or the reduction of one’s tax liability through illegal or fraudulent returns or failure to pay tax on time.[12]

For Abdulrazaq, tax evasion is a contravention of the tax laws, whereby taxable individual or company neglects to pay the tax due, or reduces the tax liability by making fraudulent or untrue claims on the income tax form. [13]

For Obafemi:[14]

Tax avoidance may simply be defined as the reduction minimization of a person’s tax liability by carefully arranging ones affairs in such a way as to take advantage of loopholes in the tax law provisions. It is the intentional act of a tax payer to pay less than what he ought to pay the tax authority. It is legal.

In the course of examining the attitude of the Court and the legislature towards tax avoidance Wheat Craft stated that:  “… tax avoidance is an art of winning games without actually cheating; thereby beating the internal revenue and the Government to their own game”.[15]

Flowing from the above it is quite clear that tax avoidance is legal and not obnoxious the concept has also been given judicial backing by the Court in the case of IRC V FISHERS EXECUTORS where Lord Summers said:[16]

My lords, the highest authorities has always recongnized that the subject is entitle to so to arrange his affairs as not to attract taxes imposed by the crown so far as he can do so within the law, and that he may legitimately claim the advantage of any express terms or of any omissions that he can find in his favour in taxing acts. In so doing he neither comes under liability nor incurs blame…

However, tax avoidance must be treated with caution to prevent a situation where some smart few individuals from using the concept as a tool of shielding themselves from taxes to the detriment of others which was expressed by Viscount Simon L.C in the case of LATILA V. IRC as follows:[17]

My lords, of recent years much ingenuity has been expended in certain quarters in attempting to devise methods of disposition of income by which those who were prepared to adopt them might enjoy while receiving the equivalent of such income without sharing the appropriate burden of British taxation. Judicial dicta maybe cited which point out that, however elaborate and artificial such methods maybe, those who adopt them are “entitled” to do so. There is of course, no doubt that they are within their legal rights, but that is no reason why their effects should be regarded as commendable exercise of ingenuity or as a discharge of the duties of good citizenship. On the contrary, one result such methods, if they succeed, is of course to increase protanto the load of tax on the shoulders of the great body of good citizens who do not desire, or do not  how to adopt those maneuvers.

The above assertion was reiterated and given support by Wilfred Green M.R in the case of LORD HOWARD DE WALDEN V IRC as follows:[18]

For years a battle of maneuvers has been waged between the legislature and those who are minded to throw the burden of taxation off their shoulders on those of their fellow subjects. In that battle, the legislature has often been worsted by skill, determination and resourcefulness of its opponents of whom the present applicant has not been the least successful. It would not shock us in the least to find that the legislature has determined to put an end to the struggle by imposing the severest of penalties. It scarcely lies in the mouth of the tax payer who plays with fire to complain of burnt fingers.

Tax evasion on the other part is illegal and frowned at by every government and patriotic citizens and as a matter of fact punishable under our laws. It is in light of the foregoing that the various tax regimes provide for the punishment of tax evasions in Nigeria. However much has still not changed due to the fact that the fines provided under our tax laws for tax evasion are to meager to discourage tax payers from evading tax.

• Tax Avoidance Devices

Somorin in his paper outlined the forms of tax evasion devices which Nigeria has identified and provided sanctions against to include:[19]

• Making an incorrect return by omitting or understating any income
• Failure to furnish a return, statement, or information to keep the required records;
• Outright refusal or neglect to pay tax;
• Omission to state income receipts from landed properties;
• Omission to state income received in or brought into Nigeria from sources outside Nigeria;
• False claim of contributions to a pension scheme;
• Reduction of quantum of tax liabilities through fraudulent tax returns.
• Under declaration or dishonest declaration of income, earnings or assets.

Combating tax evasion devices in Nigeria is challenging due to the lack of the following:[20]

• Absence of a national base; (though we started a process of tax payer identification number)
• Inadequate tax education;
• Poor record keeping
• Sophistication in tax planning especially among the multinational companies.

• Types of Tax Evasion

1. Customs: typically, importers try to evade customs duties by either under-invoicing ( reporting that less items were ordered than actually were), or by changing the product description (changing it to description of a product that has a lower duty rate)[21]
2. Smuggling: importers purport to evade customs duty by under-invoicing or misdeclaration of quantity and products-description or even importing or exporting of products through an unauthorized route.[22]
3. Personal Income Tax/Employment Tax:

Unscrupulous employers may try to evade paying employment taxes. Most often, this is done, this is done by intentionally failing to remit to the tax authorities the employment taxes collected from its employees. After a certain amount of time, the employer would then dissolve the company or claim bankruptcy, leaving the employment taxes taxes unpaid. Some other methods of employment tax evasion are: paying employees in cash; filing false payroll tax returns; or failing to file payroll tax returns.[23]

4. Vat Evasion: one of the simplest ways to evade VAT in Nigeria is to inflate the claims to deduct VAT paid at earlier stages. The simplest method is to fabricate fake invoices for purchases never made.[24]

CONCLUSION

Base on the discussions canvassed above this paper has come up with the following findings:

• That the meager punishment for tax evasion imposed by our laws as well as the difficulty in understanding them has substantially encouraged tax evasion in Nigeria.
• Inefficiency of the tax administrators has led to loss of confidence by taxpayers on the credibility of taxing authorities thereby encouraging tax evasion
• Because most government have failed to live up to their governance responsibilities majority of the taxpayers are unwilling to remit their taxes at when due for fear of enriching political individuals to their own detriment
• Multiple taxation by the taxing authorities has made most people to evade tax
• Lack of awareness as to why payment of taxes is important is quite low particularly in the rural areas which have resulted in tax evasion thereby making the government to lose revenue.

Flowing from the above findings the following suggestions are humbly put forward as follows:

• There is need for government to amend our tax laws and provide stiffer punishment for tax evasions in line with the economic realities of today.
• Tax institutions should also be strengthened towards providing quality services targeted at wooing taxpayers.
• Government should also learn to fulfill its own social contract by providing taxpayers with basic social amenities and peoples oriented projects such as good roads, hospitals, power among others.
• The Joint Tax Board should also come up with modalities that will address multiple taxation, which happens to be one of the causes of tax evasion.

[1] Onyeka, V. A and Nwankwo, C. (2014) “The Effect of Tax Evasion and Avoidance on Nigeria’s Economic Growth”  .” European Journal of Business and Management Vol. 8, N0. 24, at p. 158-159 available at http://iiste.org/journals/index.php/EJBM/article/download/32764/33659/pdf visited 9/08/2017

[2] Saidu, S. and Dauda, U. (2014) “Tax  Evasion and Governance Challenge in the Nigerian Informal Sector.” Journal of Finance and Economics at p. 156-161 available at http://pubs.sciepub.com/Jfe/2/5/4/ visited 8/08/2017

[3] Obafemi. F.J (2014) “An Empirical Study of Tax Evasion and Tax Avoidance: A Critical Issue in Nigeria Economic Development.” Journal of Economics and Sustainable Development Vol.5 N0.18 at p. 22-23 available at http://www.iiste.org/journals/index.php/JEDS/article/view%20file/16027/16410pdf visited 8/08/2017

[4] Auru, O.H (2008) “Principles and Practice of Taxation” Klinx Press, Kaduna at p.6

[5] ibid

[6] Garner, B.A(ED) (1999) “ Black’s Law Dictionary” West Publishing Co. United States of America

[7] Available at http://www.investopedia.com/terms/t/taxevasion.asp visited 10/08/2017

[8] Available at http://lexicon.ft.com/term?=tax-avoidance visited 10/08/2017

[9] Somorin, T. (29^th November-1^st December 2010) “Seminar on the Reform of Fiscal Policies Based on Innovation and Modernization of Institutions of in Charge of Collection and Management of Public Resources.” At p.1  Held at Intercontinental Hotel, Morocco.

[10] Cited in ibid

[11] Kwaghkehe, L. “ An Appraisal of the Regime of Criminal Sanctions in Nigerian Tax Laws, NIALS Journal of Bussiness Law at p.44 available at www.nials-nigeria.org>journals>lerkw…pdf  visited 10/08/2017

[12] Ayua I.A(1996)” Nigerian Tax Law” Spectrum Law Publishing, Ibadan, Nigeria.

[13] Abdulrazaq, M.T (1993)” Nigerian Revenue Law” Malt House Ltd’, Ibadan, Nigeria

        [14] Obafemi, F.J OpCit at p. 22

[15] Cited in ibid

[16] (1962) A.C 395

[17]

[18] (1942) 1 K.B 389

[19] Somorin, T. OpCit at p.3

[20] Ibid at p.4

[21] Ibid p.5

[22] ibid

[23] ibid

[24] ibid